Published on 12 Nov 2021.
RAM Ratings has reaffirmed the AAA/Stable rating of IGB REIT Capital Sdn Bhd’s (the Issuer) RM1.2 bil First Tranche MTN. This is the first issuance under the Issuer’s RM5.0 bil MTN Programme, which is secured against Mid Valley Megamall (the Mall or the Property). IGB REIT Capital is a special-purpose vehicle incorporated by IGB Real Estate Investment Trust (the REIT) to facilitate the fundraising exercise for the Programme.
The reaffirmation of the rating is premised on the transaction’s strong collateral support and our view that the Mall is poised for gradual performance recovery post-lockdown, albeit delayed from our initial expectations due to the imposition of Movement Control Order (MCO) 3.0. Klang Valley’s encouraging vaccination rate (88% as of October 2021) is anticipated to drive the return of footfall, particularly from tenants of surrounding offices, although the Mall’s recovery momentum may be dampened by weaker consumer sentiment and purchasing power resulting from the prolonged lockdown.
The Mall’s net property income (NPI) declined 21.5% to RM231.6 mil for FY Dec 2020 (FY Dec 2019: RM294.9 mil) owing to rental support extended to tenants as well as government-imposed restrictions since 18 March 2020. On an annualised basis, NPI in 9M FY Dec 2021 of RM136.9 mil remained affected by movement curbs under MCO 2.0 and 3.0, coming up to only 60% of pre-pandemic levels. While Mid Valley Megamall still achieved near full occupancy throughout the pandemic, rental collection was affected by tenants taking longer to make payments. Given that the Covid-19 bill prohibits landlords from terminating contracts or charging late payment fees (for the period between 18 March 2020 and 31 December 2021), no recourse is currently available to the management. We nonetheless see potential recovery in collection trends following the recent easing of movement restrictions and Klang Valley’s transition into Phase 4 (18 October 2021) under the National Recovery Plan (NRP).
We have maintained the Mall’s sustainable cashflow assumption at RM290 mil for now and will reassess its performance as the business environment normalises. Based on this figure, the Property’s adjusted valuation continues to provide superior credit support for the AAA rating. The transaction’s loan-to-value and stressed debt service coverage ratios stood at a respective 33.10% and 2.84 times and all relevant financial covenants had been met during the review period.
The rating is underpinned by various structural features and financial covenants to initiate the disposal of the Mall (upon the occurrence of a trigger event) while ongoing coupon obligations in respect of the First Tranche MTN are met. These include performance triggers at both the REIT and the Mall levels, the cash reserve in the debt service reserve account (DSRA) and a two-year tail period (between expected and legal maturity dates). Although property market activity remains tentative post-pandemic, we believe the market interest for strong performing assets like the Mall will be high. This, combined with the Mall’s operating cashflow together with the DSRA balance should provide adequate liquidity to facilitate an orderly disposal of the Property to meet redemption of the MTN by the legal maturity date, if a sale of the asset is triggered.
Seri Nuralya Munawir
(603) 3385 2484
Lim Chern Yit
(603) 3385 2528
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Ratings on IGB REIT Capital Sdn Bhd